After exceptional inflows in the last 3 months (May-August), Foreign Portfolio Investors (FPIs) have turned tepid in August on the back of rising US bond yields. Concerns regarding inflation and shifts in investor preferences towards safer assets have also dampened overall market sentiment for domestic equities. According to experts, higher US bond yields and default risk in China are poised to prompt FIIs to adopt a more prudent stance when considering investments in emerging markets.
The 10-year US bond yield is currently hovering around its 10-month high of 4.303 percent. If it breaches its October 2022 mark of 4.338 percent, then it will climb to its highest level since 2007.
"After three months of sustained buying with a cumulative investment of ₹1.37 lakh crores, FPIs turned sellers in August. The consolidated NSDL data shows the August FPI investment through the 18th at ₹8993 crores. But this figure includes bulk deals and investments through the primary market. In the cash market FPIs sold stocks for ₹10921 crores and they were sellers in ten days and buyers in only three days in August, so far. Strength in the dollar index at well above 103 and the US 10-year bond yield remaining around 4.25 percent are short-term negatives for FPI flows to emerging markets like India.
FPIs continue to be consistent buyers of capital goods and power. And, of late, they have started selling in financials. FPI selling is countered by DII buying, but this is turning out to be inadequate to arrest the decline in the market. In view of the strong dollar and rising US bond yields, FPIs are likely to continue selling, in the near term," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Meanwhile, Mukesh Kochar, National Head - Wealth Management, AUM Capital also noted that the recent volatility in FPI flow is attributed to renewed fear of the Fed hiking rates further in its next policy in September. He further added that the valuation of Indian equity is also not cheap and is supported by funds flow.
He believes that the market will be eager to hear the comment of the federal chairman during the Jackson Hole event to take a clue and that the next FED policy is very crucial.
"The FPI flows may remain subdued in the short term until FED clarity but India will remain a sweet spot for long-term allocation among emerging markets. All other emerging markets have some issue or other. The next 5-10 years belong to India and FPIs have no choice but to come to India," he predicted.
Similarly, brokerage ICICI Securities also believes that the worries regarding FPI outflows are unfounded.
"The most recent surge in US yields - from about 3.75 percent to 4.3 percent - was triggered by the rating downgrade by Fitch and is putting pressure on FPI flows towards India. However, the US 10-year bond yield is likely to be near its upper range given the outlook for inflation. This should alleviate concerns around FPI outflows even as structural domestic equity flows in India continue to be positive as evidenced by record-high SIP (systematic investment plan) flows,” the brokerage said.
Current core inflation trends and forward projections do not indicate further flare-up in inflation in the US. It means the medium-term outlook for rates continues to be benign, it added.
Overall in 2023, FPIs have bought shares worth ₹1.31 lakh crore.